12 September 2003 GST/HST Interpretation 45726 - Application of GST/HST to the Payment of "Rate Buy Downs"

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction described below.

Statement of Facts

Our understanding of the facts is as follows:

1. Company A is a manufacturer of machinery.

2. In order to promote the sale of machinery, Company A has arranged with a financing company, Company B, to offer XXXXX % financing to the customers of Company A.

3. Company A sells a piece of machinery for XXXXX to Company C. It collects $XXXXX plus $XXXXX in GST from Company C.

4. Company C pays the $XXXXX in GST upfront to Company A. Company C receives financing for the $XXXXX at XXXXX % over XXXXX years from Company B. Company C's monthly payments are approximately $XXXXX per month.

5. Company B gives Company A the $XXXXX for the purchase of the machine on behalf of Company C.

6. Company B requires a rate of return of XXXXX % on the money it lends. The present value of a stream of monthly payments of $XXXXX for XXXXX years discounted at XXXXX % is approximately $XXXXX. Therefore, Company A is required to pay Company B a "rate buy down" of $XXXXX to enable Company B to receive its required return of XXXXX % notwithstanding the rate charged to Company C.

7. As far as Company C is concerned, they are repaying a loan of $100,000 with an interest rate of XXXXX % and the agreement for the loan is with Company B.

Interpretation Requested

Is the payment of the rate buy down subject to GST?

Interpretation Given

Based on the information provided, the rate buy down payment made by Company A to Company B may not be subject to GST/HST. Where the contract entered into between Company A and Company B clearly indicates that the rate buy down is a payment of money as interest in respect of a financial instrument (i.e., the loan to Company C), the payment would not be subject to GST/HST. The financial instrument is the right Company B has to be paid money by Company A once Company B has made a loan to Company C at the lower rate of interest.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-952-9577.

Yours truly,

Marilena Guerra
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate